Manisha Arora asked on 05/02/2023

What are the tax implications on NRI on mutual funds?

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SBNRI Team
answered on 28/02/2024

Tax implications on Mutual Funds for NRI: Different types of Mutual Funds are taxed differently

 

Equity Mutual Funds Taxation for NRI

 

In the case of equity mutual funds, any holding of less than one year will be termed as short-term, and selling of such investment will carry a short-term capital gain (STCG) of 15%. Similarly, for equity mutual fund investments held for more than a year, long-term capital gains (LTCG) up to 1 lakh per year will be exempt. Any LTCG above Rs 1 lakh will be levied at 10% without any indexation benefit.

 

Also read: Best SIP to Invest in 2024 – Top 10 SIP Mutual Fund Plans for NRIs/OCIs

 

Debt Mutual Fund Taxation for NRI

 

The debt mutual fund tax has been changed with effect from April 1, 2023, after the Budget 2023 brought certain amendments. Debt mutual funds will no longer be allowed to avail of indexation benefits from FY 23-24. Any gains made on debt mutual funds investment will now attract taxation on applicable slab rates of the investor’s income bracket.

 

How does new taxation on Debt Mutual Funds work?

 

Let’s take the following example for clarification and compare the old taxation vis-à-vis new taxation.

 

Example: Mr Anurag invested Rs 15,00,000 in FY 2017-18 in debt mutual funds. He sold the same after holding it for three years in FY 22-23. Here’s a comparison of his taxation pre-amendment and new rules.

 

Sale Price25,00,000
Investment Amount15,00,000
Indexed cost of Investment (Investment*331/272)18,25,368 (rounded off)
Long-term capital gain (Sale Price – Indexed Cost of Investment)Note: CII for 2017-18 was 272 and CII for 2022-23 was 3316,74,632
LTCG payable @20%1,34,927

 

Now let’s take a present-day case for comparison:

 

Example: Mr Anurag invested Rs 25,00,000 in debt mutual funds in FY 23-24 and sold the same in FY 27-28 for Rs 37,00,000. Basis new mutual fund taxation 2024, here’s how it will taxed:

 

Sale Price37,00,000
Investment Amount25,00,000
Capital gain (Sale Price – Cost of Investment)12,00,000

 

Note: Your capital gains will be part of your income for the said FY when you sell the debt mutual fund and accumulate the capital gains. This will then be taxed as per your income slab rates for the year.

 

Non-Resident External (NRE): The NRE account can be opened for the purpose of maintaining the income earned outside India with tax free interest (upto 7.60%) on Fixed Deposits. Both the principal amount and interest earned are completely repatriable from India.

 

Non-Resident Ordinary (NRO): The NRO account can be opened for the purpose of maintaining the income earned from India such as income from rent, pension, etc. The repatriation of the money in the account can be done up to a maximum of 1 million USD per financial year. Note: 30% tax + surcharge + education cess will be deducted at the source of interest earned in India (only current income such as rent, pension etc. can be repatriated)

 

Now, a clear understanding of these two accounts makes it clear that for NRE Accounts, since the funds are fully and freely repatriable, any investment done through this account such as in mutual funds will be subject to TDS (Tax Deducted at Source) so that as soon as you get money in your NRE account, that is fully repatriable without any hassle where as for NRO Accounts; it is clearly mentioned that 30% tax + surcharge + education cess will be deducted at the source of interest earned in India.

 

NRI Income Tax Slab Rates for AY 2024-25 (FY 2023-24) – New Tax Regime & Old Tax Regime

 

Income Tax SlabOld Regime Slab Rates for FY 23-24 (AY 24-25)
Up to Rs. 2.50 lakhNil
Rs. 2,50,000 -Rs. 5,00,0005%
Above Rs. 5 lakh to Rs. 6 lakhRs. 12,500 + 20%
Above Rs. 6 lakh to Rs. 7.50 lakhRs. 12,500 + 20%
Rs. 7.50,000 to Rs. 9,00,000Rs. 12,500 + 20%
Rs. 9,00,000 to Rs. 10,00,000Rs. 12,500 + 20%
Rs. 10,00,000-Rs. 12,00,000Rs. 1,12,500 + 30%
Rs. 12,00,000-Rs. 12,50,000Rs. 1,12,500 + 30%
Rs. 12,50,000-Rs. 15,00,000Rs. 1,12,500 + 30%
Above Rs. 15,00,000Rs. 1,12,500 + 30%
Income Tax SlabNew Regime Slab Rates for FY 23-24 (AY 24-25)
Up to Rs. 3 lakhNil
Rs. 3,00,000 -Rs. 6,00,0005% (Rebate u/s 87A available)
Rs. 6,00,001 lakh to Rs. 9,00,00010% (Rebate u/s 87A available for taxable income up to 7 lacs)
Rs. 9,00,001 to Rs. 12,00,00015%
Rs. 12,00,001 to Rs. 15,00,00020%
Above Rs 15,00,00030%

However, you can later claim for a tax refund according to your tax slab. 

 

So, to summarize Tax implications on mutual funds for NRI: YES! Mutual Funds investments in India are taxable for NRIs and TDS is the major instrument of taxation NRIs are subject to. 

 

Note: NRIs need not pay double taxes. There is a provision called DTAA (Double Taxation Avoidance Treaty). If the DTAA is signed between India and the country of residence of the NRI, the NRI will not be paying double taxes on the same source of income. NRIs will however need to pay differential taxes. (For example: If for a certain investment, taxes are 30% in India and 40% in the USA, NRIs from the USA need to pay the remaining 10% to US.)

 

India has signed DTAA with more than 85+ countries all around the globe including USA, UK, Saudi Arabia and UAE. You can check the list of the countries and find additional information regarding DTAA here.

 

To get expert advisory on Mutual Fund Taxation from SBNRI, contact us using the button below.

 

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